Facts
The appellant, GEIS, operated networks for customers providing
business communications services with an element of security.
To do this, it obtained software packages from a variety of
sources, including the respondent, Harbinger.
The relevant dispute arose from an agreement dated 19 August
1996. Assignments had taken place since the original
agreement but no point was taken on that. The basic
arrangement set up by this agreement was common enough: GEIS was a
VAR, supplying the product to customers to whom it was authorised
to grant sub-licences. A model form of “end-user agreement”
was included.
On 30 December 1998, Harbinger gave notice to terminate the
agreement with effect from 31 December 1999, and proceedings were
commenced shortly thereafter. The report of the decision at
first instance is given at [1999] Masons CLR 335, and it will be
recalled that HH Judge Thornton determined that this notice was
valid in itself. The issue in the appeal related to
Harbinger’s liability for continuing support and maintenance.
The full terms of the relevant clause are as follows:
Clause 10 – Support and
Maintenance
[Harbinger] will provide support and
maintenance in perpetuity for an annual payment as specified in
Schedule One, and subject to the following conditions: [there are
then some conditions]”
The whole issue in the case
revolved around the meaning of what was meant by “in perpetuity”,
in particular, in circumstances where the agreement had been
validly terminated. Harbinger, foreseeably, argued on the
appeal that the obligation to provide continuing support and
maintenance terminated with the valid termination of the
agreement.
Judgment
The correct approach to the construction of commercial documents
has been re-stated clearly in the decision of the House of Lords in
Investors Compensation Scheme Limited v West Bromwich Building
Society [1998] 1 WLR 896. The judge at first instance
was clearly right to look at the overall contractual situation and
took into account the model end-user agreement, which itself
required GEIS to provide support and maintenance to end users for
at least 2 years after delivery. Furthermore, the support and
maintenance obligations appeared in the main agreement to be
severable from the main obligation to supply the product to
GEIS. Thus, “in perpetuity” meant that support and
maintenance survived termination by Harbinger of the main
agreement.
However, the next question was
rather more difficult: for just how long should the support and
maintenance obligation then last? At one extreme, GEIS argued
that is meant just that – “for ever” or “until the crack of
doom”. Put more precisely, the unilateral contract
constituted by the agreement lasted for so long as the payments to
Harbinger were made by GEIS.
Harbinger’s response was to say that this gave rise to an
“uncommercial” result, thus necessitating a search for some shorter
period that was still compatible with the words of the
agreements. They said that the support and maintenance
obligation had therefore to last a “reasonable” time, adopting the
interpretation of the judge at first instance.
However, Judge Thornton had not adopted either of the parties’
submissions on this issue. He had observed that GEIS could
give notice to its own customers after an initial period of 2
years. Accordingly, he had held that the obligation “in
perpetuity” lasted only until the end of that period, i.e. the time
when the last of GEIS’ customers’ licences could be validly
terminated.
The Court of Appeal disagreed with that conclusion. It was
inconsistent with the words “in perpetuity” that there should be
some imposed time limit, and the words rather meant “without limit
of time”. This did not mean “until the crack of doom”, since
technology would become outdated, and customers would require
something else anyway. It was just impossible to predict when
the last such customer would move to something different. In
other words, the full force of “in perpetuity” – that is, without
limit of time – had to be given their ordinary meaning, and no
restraints of “commercial” reasoning could override this.
Against the argument that it was “uncommercial” for Harbinger to
have to provide support and maintenance even for one customer it
had to be remembered that Harbinger had been able to advertise the
extended support and maintenance and benefit from that.
Commentary
This is an interesting case, and the first instance decision was
reported in an earlier edition of the Masons CLR. There, we
commented that Judge Thornton’s solution to the conundrum posed by
the drafting of this agreement was a neat and commercial
solution.
The Court of Appeal disagreed. The proper construction of
agreements has always been a vexed topic, and common law judges
have always striven to give sensible effect to what persons in the
business community have agreed. The balance of how they do
this came up again for consideration in Investors Compensation
Scheme Limited v West Bromwich Building Society, where the
House of Lords made some interesting observations.
That case arose out of investments that home-owners could make
by securing a further advance on a mortgage, and investing the sums
so obtained in equities. With rising interest rates and
falling equities, this scheme came to grief, leaving many badly
affected investors. The claims were taken over by the
Investors Compensation Scheme set up by the Financial Services Act
1986, and the case centred on the meaning of clause 3(b) of the
assignment of rights of action by an individual investor to the
ICS. This clause had an exception, but did it exclude all
third party claims or just claims for rescission? The natural
meaning of the words excluded all third party claims from the
assignment, but this made a nonsense of the agreement. In an
earlier case, the judge therefore held that the exclusion was
limited to claims for rescission, therefore, against the natural
meaning of the words.
Lord Hoffman gave the judgment of the majority of the House of
Lords and put forward 5 principles for the construction of
documents:
- ascertain the meaning that the document would have for a
reasonable person having all the background knowledge reasonably
available to the parties in the situation in which they were at the
time of the contract
- this background – “the matrix of fact” (see Lord Wilburforce in
Prenn v Simmonds [1971] 1 WLR 1381) – could be anything
which would have affected the way in which the language of the
document would have be understood by a reasonable man
- exclude evidence of negotiations except in actions for
rectification
- the meaning that a document has for a reasonable man may be
different from the meaning of the strict words or syntax – it may
even be that the parties used the wrong words or syntax
- words must be given their “natural and ordinary meaning”, but
this did not mean a judge had to attribute to the parties an
intention they plainly could not have had.
This last point was well made by Lord Diplock in Antaios
Compania Naviera SA v Salen Rederierna AB [1985] AC 191,
201:
"if detailed semantic and syntactical
analysis of words in a commercial contract is going to lead to a
conclusion that flouts business commonsense, it must be made to
yield to business commonsense."
In the Investors Compensation Scheme case, for
example, the House of Lords looked not only at the (unhelpful)
words of the contract in question, but also at the explanatory
notes to understand the overall meaning. Similarly, in the
Harbinger case, it was not just a question of looking at the words
“in perpetuity” in isolation, but rather looking at the whole
commercial scheme set up by that agreement and the end user
agreements as well, and understanding the legitimate commercial
expectations and understandings that the parties would have
had.
This makes excellent sense for the parties if courts will take
account of these practical matters as well as the actual
interpretation of the words. The problem is that two people
looking at the same problem will come to different conclusions, as
here. Judge Thornton came to a conclusion, based on all
relevant factors, and the three judges of the Court of Appeal came
to another. Cases abound where matters can go all the way to
the House of Lords, with judges divided at all levels, all
apparently applying the same canons of construction.
So rules of construction will not lead of themselves to one, and
only one, interpretation. Always remember that the commercial
purpose must be kept at the forefront of the mind, and the words
will be interpreted accordingly. It is refreshing to note
that the courts will not give an interpretation at odds with what
the parties must have agreed (i.e. wanted to agree) and that one
possible option is that court will, in extreme cases, conclude that
the parties used the wrong words or syntax. In a sense, the
present situation is harder for those called on to construe
documents: gone are the days (if they ever existed) when all that
was necessary was to look at the words and apply them. Now,
any clause in an agreement could be subject to review and analysis
in accordance with the parties’ reasonable understanding of their
respective positions. As has been seen, rather than easier,
this can actually make the process of arriving at the correct
interpretation a more difficult process.
